Invoice finance and crowdfunding are two competing options for alternative funding which might be the answer for businesses unable to access bank loans. However, how do these two forms of SME finance compare?
This is where lots of individuals come together to provide finance for a project, with all investors looking for a return on their money. Investors lend their money directly to companies, allowing cheap borrowing and lending rates.
This form of funding is becoming increasingly popular, and is made even easier by the internet. The crowd-funding company becomes a middleman, matching lenders to borrowers, and escapes a lot of the red tape that surrounds other lenders. However, this also means that if something goes wrong, the lending environment is not as controlled and the whole platform could collapse.
While there have been lots of success stories of small businesses using this mode of finance, there are a couple of obstacles. Crowdfunding platforms will be looking for the lowest risk ventures to encourage investors, and there needs to be a surplus of good businesses looking for funding in order to give investors good returns. So, the businesses that will do best from crowdfunding are ones with a good credit rating, good cash flow, and the ability to offer some sort of personal guarantee. So, in other words, those businesses who would be eligible for bank funding in the first place.
Invoice finance is a very different option. This allows businesses to borrow against their own assets, that is their unpaid customer invoices, letting them unlock the money that is tied up in customer debts. Far from needing a good cash flow to apply, invoice finance options such as factoring and invoice discounting can both help businesses with tight cash flow.
Businesses that offer credit terms of 30, 60 or 90 days will be able to use invoice finance, which can release around 90% of the invoice value within 24 hours. The remaining 10% is released when the customer clears their debt, minus a small borrowing fee.
Invoice finance can help with late payment issues, and there are a variety of options for small businesses, bigger businesses and seasonal businesses. Invoice discounting, factoring and selective factoring are all options that could help your business.